Insurers recover from calamity

The performance of general insurers is expected to prop up earnings in the industrials sector this fiscal year as they emerge from the worst catastrophe season on record.

An estimated 40 per cent of June- half earnings growth for the industrials ex-banks sector is expected to come from general insurers recovering losses from natural disaster claims through premium rises, according to recent research by Deutsche Bank.

Deutsche said that in this half, insurers would see an estimated $622 million in earnings growth, compared with $360 million growth from food retailers and $186 million from transport companies.

Commonwealth Bank analyst Ross Curran said insurers were likely to report robust profits in their end of financial year results in the absence of any major natural disasters that had eroded earnings over the past few years.

“Overall corporate earnings will be aided by that [general insurance companies] assuming we don’t get an earthquake tomorrow," he said.

“Because you have had three or four bad years in a row, this year is looking more normal.

“You have also had pricing increases on some products helping margins, so if you have anything like a normal weather year then margins should be significantly better than they have been in the past," Mr Curran said.

CBA expects
Insurance Australia Group
to report a $505 million group net profit after tax in fiscal 2012 and $768 million in 2013 – a major improvement from a $208 million loss in 2008. The bank’s analysts also expect group net profit for
Suncorp
to reach $869 million this financial year and $1147 million in fiscal 2013, up from only $453 last year .

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By contrast, during the December half, general insurers, airlines and steel companies proved to be a big drag on the Australian share market.

In 2011 insurance companies paid out millions of dollars in claims in response to the Queensland floods, cyclones and the New Zealand earthquakes.

Merrill Lynch strategist Tim Rocks said the attraction of general insurers was the dynamic of only a few key players with strong market power.

“If there are no more ongoing natural disasters they should be able to rebuild their margins very quickly over time," he said.

IAG and Suncorp have a combined 70 per cent share of the personal insurance market, where customers tend to demonstrate brand loyalty.

Forecasts of better earnings in the sector provide investors with reason to include insurers as a defensive element in their portfolios as they are linked to weather cycles rather than the economy.

Over the past year,
QBE
share price has fallen nearly 20 per cent as investors reacted to lower US bond yields and a profit downgrade but it has recovered to add 7 per cent since January as incoming chief executive John Neal prepares to take the reins and the commercial insurer pushes through price rises.

Similarly, shares in IAG rose 4.5 per cent over the past year but have jumped 17 per cent since January as it pushes ahead with Asian acquisitions and moves towards break-even for its loss making UK arm.

Suncorp – the market darling of the sector for much of last year – is the exception; its shares falling 2 per cent since January after rising nearly 5 per cent over the past year.

Suncorp’s bank division has been viewed with greater caution by some investors this year as bad debt recoveries slow and funding costs remain high.

Despite Australian shares grinding higher over the six months, overall, corporates face significant challenges, with the prospect of fiscal tightening and a strong Australian dollar weighing on economic growth.

Australian shares continue to underperform major global markets and this has been put down to weaker corporate earnings.

Some strategists are forecasting flat earnings growth this financial year.